Under Armour: Still Overstocked

Another quarter. Another beat. Another raise. (Honestly, folks, Under Armour's (NYSE: UA  ) overachievements are starting to get a little boring.) Here are this week's relevant stats:

  • Sales were up 42% in comparison to last year's Q2 -- $291 million.
  • Earnings nearly doubled to $0.12 per share -- 50% ahead of the original estimate.
  • Best of all, the company's laggard footwear business appears to be picking up the pace. Sales gained 31% in comparison to last year.

And going forward, Under Armour promises more of the same. With growth going great, CEO Kevin Plank pledged to finish out this fiscal year with 34% sales growth and 40% better operating profit than last year.

Great news, right? Well, not so fast. Shares are trading down today -- and there's actually good reason for that. Once again, Under Armour reported that accounts receivable and inventories grew faster than revenues during the quarter (up 45% and 74%, respectively.) Once again, free cash flow suffered from Under Armour's poor cash management. After burning through $27.5 million in free cash over the course of H1 2010, Under Armour shoveled even more cash in the furnace in H1 2011. Free cash flow for this first half ran negative to the staggering sum of $113.8 million.

Foolish takeaway
Maybe I'm just old-fashioned, but I've always been partial to investing in companies that actually earn cash from their businesses, rather than consuming it. Companies like Nike (NYSE: NKE  ) , for example. Last month, Under Armour's archrival "beat earnings" just like Under Armour did -- but it did so while generating positive free cash flow of $713 million. Elsewhere in footwear, Deckers (Nasdaq: DECK  ) is churning out nearly $100 million in annual free cash flow. Timberland (NYSE: TBL  ) -- soon to become part of VF (NYSE: VFC  ) -- is FCF-positive by more than $50 million. Wolverine World Wide (NYSE: WWW  ) ? $17 million. Heck, even Crocs (Nasdaq: CROX  ) is creating cash these days -- nearly $60 million over the past 12 months.

I don't own any of these stocks, mind you. But I'd buy any one of them before I'd even consider trying on Under Armour.

Time to chime in
Like I said, though -- that's just me. I know other Fools think differently, and at least two Motley Fool newsletter teams have recommended the stock. So feel free to disagree. Tell us what you think about Under Armour's quarter on Motley Fool CAPS.

The Motley Fool has a disclosure policy. Fool contributor Rich Smith holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour, Timberland, and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors.

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  • Report this Comment On September 13, 2011, at 3:17 AM, rodessa wrote:

    I agree fully with your opinion.It is the same for the last quater of Lululemon, with a big increasing of inventories of 70% (from 17777000 to 30164000) and at the same time a big decreasing of 44%(from 34552000 to 19529000) of the net cash provided.It is for me a sign of weakness and I am now short on LULU as it has a very high P.E.R. of more than 60.I prefer much more NIKE with a P.E.R. three times lower of less than 18 and it's $ 713 millions generated cash flow.A very good runner !!! According to canadians journalits, the high level of margin of LULU could be explained partly by the heavy reliance to free work in Lululemon and Lululemon could have problems soon because of that, as not legal, and certainly the same in the States.

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